Wednesday, April 11, 2018
The Death of the Defined Benefit Pension
Traditional defined benefit plans or pensions have been fading away for decades. Employers don’t want the open-ended obligation and have been closing plans to new hires and in some cases freezing plans altogether. A defined benefit pension pays the employee a set annual income in retirement. An employer can pay an income based on the employee’s earnings at the end of their employment with a company. However, defined benefit pensions can also include career average calculations, or other methods of setting the income paid in retirement. However they calculate the defined payment, they will pay the employee a set income for life.
The crucial thing to remember about defined benefit pensions is that the employer is obligated to pay out a certain amount of income every year after retirement and must take responsibility for funding that lifelong payment stream based on the defined benefits plan document.
Pensions were popular during an earlier era of long-term company loyalty. People worked a large portion of their lives with one company and after many years, based on salary and years worked, the employee would receive a monthly payment until they passed away. However, today most employers have changed and are now offering a 401(k) with a company match – leaving the employee with much more responsibility for the planning of income during retirement.
A 401(k) plan is a type of a retirement plan offered to an employee through an employer. 401(k)s are the most common kind of defined contribution retirement plan. Here’s how they work: The employee decides how much they want to contribute from their paycheck, and the employer puts that money into the employee’s individual account on the employee’s behalf. The investment happens through payroll deduction. The employee decides what percentage of their salary they would like to contribute and, from then on, that amount comes straight out of their paycheck and goes into their account automatically. Some employers offer a match up to a certain percentage or dollar amount that the employee contributes. The employee’s company serves as the “plan sponsor” for the 401(k), but it doesn’t have anything to do with investing the money other than to provide a host of choices within the plan. Instead, in most instances the employee is left to make their own investment choices within the available options offered in the plan.
This leaves a lot of burden on the employee to make good sound financial decisions on not only how much to contribute, but how their 401(k) is invested. Their employer may have a relationship with the company that administers the 401(k) to help them allocate their investments, but others may not. If you have the proper securities licenses and your broker/dealer or registered investment advisor allows, you may be able to help the employee and make allocation options.
However, this still leaves it to the client to figure out how to begin drawing an income off their 401(k) once they retire. In the past under defined benefit pensions, employers would do this for their employees. Now most employees retiring need to plan for their own retirement income stream, since a pension is not available.
As a financial professional, one way you can provide a client with an income stream for life is through an annuity. This can be accomplished either by annuitization or a guaranteed lifetime withdrawal benefit rider. Annuitization converts an annuity accumulation value into a series of periodic income payments. The client can choose from a variety of payment options. However, once the benefit has started the client no longer controls this asset. The payment is set.
A lifetime withdrawal benefit also provides an income stream based on the life payout of an individual or couple. However, the product’s accumulation value remains under the client’s control even after payments have begun. Income benefits are designed to provide income options above and beyond the standard annuitization or free withdrawal features in annuities. This benefit may be included with the base product or may be available as a rider for an additional cost.
Due to the flexibility and features available, many individuals are opting for a guaranteed lifetime withdrawal benefit on their annuity. However, not all lifetime withdrawal benefits are created equal and there are several key questions that should be answered in order to determine the most appropriate income solution for your clients.
A lifetime withdrawal benefit on an annuity is something that you may be able to offer your clients who don’t have the fortune of having a defined benefit pension plan to count on for consistent retirement income. Ann Arbor Annuity
Exchange represents many insurance carriers that offer products with lifetime withdrawal benefits. Give one of our experienced marketers a call to talk about the benefits and features of these products at 800.321.3924.
Nick Bates | Vice President of Annuity Sales
Ann Arbor Annuity Exchange
Ph: 800.321.3924 x121 | Dir: 734.786.6121
Designed for Financial Professionals.